Terminology in the Franchise Industry

If you are new to the world of franchising, the terminology used on a day-today basis can be mind-boggling. Here we summarise the most used words so you can get to grips when reading about franchise opportunities and speaking with businesses.

Block Exemption – the European Union concessions to franchising which bypass the normal EU anti-restrictive trade practices legislation seeking to protect competition – which, for example, 'exclusive areas' can be deemed to contravene.

British Franchise Association (bfa) – the bfa grants membership to those franchisors it considers meet its Code of Ethics and procedures.Business Format Franchise – the franchisee buys into a total turnkey system of brand, know-how, training, methodology and support.

Buyback – where the franchisor agrees to purchase a franchise back from a franchisee if the latter no longer wishes to continue.

Disclosure – the practice of revealing detailed information about the franchisor's business track record and franchise package. This is a legal obligation in, for example, the USA, but voluntary in this country.Franchise Agreement – documents the legal relationship of obligations existing between the franchisor and a franchisee.

Franchisee – the person who buys a licence to replicate a business system. Also known as franchise owner.

Franchise Package – the sum total of franchise system rights licensed to the franchisee, including branding, know-how, systems, territory and training for which an initial Franchise Fee is charged by the franchisor.Franchising – method of marketing goods and services via a business formula licensed for others to copy.

Franchisor – a company that offers the licence to replicate its system.

Intellectual Property Rights – the franchisor's secrets of doing business and various trademarks, branding, manuals, etc., which should be legally protected before being sold in a franchise package.

Management Service Fees (MSF) – fees due to the franchisor, often based upon total turnover.

Master Franchisor – the entity that grants Master Franchises to others – this is usually used in international contexts.

Operations Manual – the detailed document or 'bible', which describes every item of the business system and work procedures.

Pilot Operation – an independent operation that tests the franchise concept and incorporates actual financial, organisational and logistical pressures to be faced by franchisees in different areas.

Profit & Loss (P&L) Projections – the calculations, based on the franchisor's, pilot's and franchisees' experiences, which try to predict how soon franchisees can expect a return on their investment, year-to-year turnover and profits.

Renewal – the legal provisions in the Franchise Agreement for renewing or not renewing the franchise for a further term of years.

Return On Investment (ROI) – the calculations or expectations that franchisees work on to assess when they can 'break even' on their initial investment in the franchise and start earning profits.

Term – the agreed period of years (eg five, 10, 15) for which a franchise is granted through the Agreement.

Termination – the legal provisions by which either party in the relationship may terminate the contract, e.g. for breach of contract.

Territory/Area – the 'exclusive' portion of land, on a national, regional, county or postcode basis, which is allocated to franchisees as part of the franchise package.

Types of Franchises

Area Development Franchise – a franchise that includes the rights to expand a region through appointed sub-franchisees or multiple managed outlets.

Job Franchise – where the franchisee is a hands-on owner-operator rather than a manager, usually linked with van-based services such as maintenance.

Joint Venture Franchise – where the franchisor also takes a financial stake in the project – often in international Franchise Agreements.

Management Franchise – a franchise in which the owner manages the operation and co-ordinates employees to do the actual work.

Master Franchise – the systems and brand of a large territory licence – a country or region.

Resale – a franchised area already established by a franchisee, which is offered for sale because the original franchisee wants to realise his investment, move on, or simply retire. More expensive to buy than a 'virgin' franchise area, a franchise resale has the advantages of an ongoing customer base, referrals, goodwill and income from day one.